India’s Extreme Makeover

India long was a favorite of international investors for its rapid growth rates, enormous market and promising demographic trends, but last summer’s taper tantrum exposed its Achilles’ heel: a yawning current-account deficit as the country imported and consumed much more than it could afford.

That was fine as long as outsiders were willing to bridge the gap, but when the Fed’s taper talk raised the prospect of higher returns back home — and India’s own economic growth hit a rough patch – investors retreated en masse, sending India’s currency and markets plunging.

Once a proud member of the BRICS club of most-promising emerging markets, India now found itself lumped in with the “Fragile Five” – developing economies whose poor fundamentals left them most exposed to swift and damaging outflows of capital.

Fast-forward nine months. India still is struggling with elevated levels of inflation that have forced the central bank to raise interest rates a number of timesdespite poor economic growth. The policies it adopted to deal with the crisis have come down particularly hard on some sectors. But the current-account deficit has come down from about 6.5% of gross domestic product last year to just 0.9% now – a remarkable swing in such a short time. Investors haverewarded the change, buying Indian assets even as they sold out of other emerging markets during the most recent bout of market turmoil early this year.

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